Emerging Markets

Top Funds Shut Their Doors

The developing markets are trickier than ever to navigate, making it crucial that investors find a fund manager they like. The problem is, many of the top funds are now closed to new investors. Here are a few alternatives.

These days, strategists are more likely to recommend individual emerging-market stocks, rather than emerging-market stock markets. There's only one problem: Some of the asset class's best stockpickers are closing their funds to new investors.

The developing markets are increasingly fractured and hard to navigate, which is why strategists from the likes of HSBC, Barclays, and Morgan Stanley are recommending that investors pursue "alpha" (that is, stock-picking), over "beta," or tracking an index. The MSCI Emerging Markets Index is down 1.7% this year, largely due to very localized troubles—like a less-than-spectacular Chinese recovery, heavy-handed regulation in Brazil, and uncertainty over economic reform in India. But there are plenty of individual countries and stocks that are rising, giving a good stockpicker the opportunity to buy the winners and avoid the losers.

Picking a good fund manager is never easy, however, and it's made more difficult by the fact that some of the best are closing to new investors. So far this year, three of the largest—and best-performing—funds have announced that they will close their doors to most investors who don't already own shares: The $32.8 billion
Oppenheimer Developing Markets
Fund (ticker: ODMAX) will close to new investors as of April 12, while the $8.2 billion
Virtus Emerging Markets Opportunities
Fund (HEMZX), and the $10.9 billion
Aberdeen Emerging Markets
Fund (GEGAX) have already begun limiting new money.

How well have these funds performed? The Oppenheimer fund has returned 6.2% annually during the past five years, ranking it among the top 4% of emerging-market funds, according to Morningstar; the Virtus fund has returned 6.7%, good for the top 2%; and the Aberdeen fund has returned 10.7%, putting at the top 1%. Each fund also ranks in the top-10 of alpha producers during that period, meaning it wasn't just a hot asset class that boosted their returns.

With performance comes new money. The Oppenheimer fund added $5 billion in 2012, according to Morningstar; it started the year with $20.3 billion. The Virtus fund added $3.4 billion of new money in 2012, more than doubling its assets. All that new money, though, can be tricky to deploy, especially in stocks that trade infrequently or are on the small side. Hence the new closings, adding to the list of other top performers like the $15.7 billion
Lazard Emerging Markets Equity
Fund (LZEMX) and the $3.4 billion
Invesco Emerging Markets
Fund (IEMAX) that are no longer available to new investors.

THIS MAKES IT TOUGH, but not impossible, to find solid (if less exciting) choices, says Morningstar analyst Karin Anderson. There's
American Funds New World
Fund (NEWFX), which divides its assets among multiple managers and even includes developed-world companies that get a sizable piece of their revenues from developing nations. The
Thornburg Developing World
Fund (THDAX), meanwhile, has been near the top of the alpha list based on its three-year returns, but was only launched at the end of 2009.